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Righting a shareholders’ wrong

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Sydney Mitchell and a team of leading barristers and experts have assisted a shareholder in recovering substantial damages following his removal as a director and dilution of his shareholding.

Due to an accounting error the company’s balance sheet and trading had been overstated with a result that a capital contribution from the shareholders was needed.

Kam Majevadia commented:

The issue for the court was whether the capital contribution was in fact needed, and secondly whether the method of cash input was fair against the background where the course of action adopted had the effect of diluting the shareholder’s holding to a fraction of what it was.

The Defendants argued that the company was technically insolvent without a capital contribution of £150,000 and consequently issuing 150 shares at par was not unfair as without it the company was worthless.

The Shareholder argued that the company had real value, pointing to various long term contracts, trading history and goodwill.

Accordingly, the shareholder argued that the company’s shareholding should have been professionally valued and the number of shares actually needed to remedy the balance sheet, if in fact needed, issued.

The shareholder’s position was that each issued share had a value of near £25,000 so that only 6 shares needed to have been issued with the effect that his shareholding would have been reduced by as little as 2% and not the resultant 32%.

Notwithstanding, extensive attempts to settle the matter at mediation and prior to court proceedings the matter proceeded to trial. On day 5 of a 10 day trial the Defendants’ accountant admitted in evidence that the company was solvent, he had applied the wrong test, and that the company had significant value. The case settled shortly thereafter with a significant damages award for the shareholder.

Sydney Mitchell acted for the claimant shareholder on a ‘no win no fee’ agreement, along with the leading barrister.

If you have a shareholders’ or partnership dispute contact Kam Majevadia on 0121 746 3300